The ins and outs of european unemployment

The Ins and Outs of European Unemployment
Barbara Petrongolo and Christopher A Pissarides∗

In this paper we study the contribution of inflows and outflows to the dynamics of unemployment in three European countries, the United Kingdom, France and Spain. All countries are interesting in their own right and in the comparison with each other. Britain’s labour markets were strictly regulated up tothe mid 1980s but they have been liberalized since then. France is still a regulated economy compared with Britain, with unemployment averaging about 8%. Spain has had the biggest rise in unemployment in Europe, reaching 24% in the mid 1990s, but policy reforms and fast growth since then brought it down to a level below France’s. We compare performance in these three countries making use of bothadministrative and labor force survey data. We find that the impact of the 1980s reforms in Britain is evident in the contributions of the inflow and outflow rates. The inflow rate became a bigger contributor after the mid 1980s, although its significance subsided again in the late 1990s and 2000s. In France the dynamics of unemployment are driven by the outflow rate virtually entirely, which isconsistent with a regime with strict employment protection legislation. In Spain, however, both rates contribute significantly to the dynamics, perhaps as a consequence of the prominence of fixed-term contracts since the late 1980s.

I. Accounting for the dynamics of unemployment
Several authors have recently addressed the question of unemployment dynamics. They follow a similar approach, albeit withsome variations. Features that might differ across
∗ Department of Economics and Centre for Economic Performance, London School of Economics, Houghton Street, London WC2A 2AE, U.K. Email addresses: b.petrongolo@lse.ac.uk; c.pissarides@lse.ac.uk. We acknowledge with thanks research assistence from Alejandro Tamola and financial assistance from the Centre for Economic Performance, a designated researchcenter of the Economic and Social Research Council.

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studies include (a) whether it is explicitly assumed that there are three states (employment, unemployment and out of the labor force, henceforth, inactivity) or two (employment and unemployment), and (b) what “time aggregation” is used to deal with the fact that flows in and out of each state are taking place continually but dataobservations are taken at discrete times. Robert Shimer (2007) uses a method based on observations of short term and long term unemployment to deal with time aggregation in the two-state case. Michael Elsby, Ryan Michaels and Gary Solon (2007) use a discrete-time variant of this procedure, based on the fact that the CPS uses the week as its reference period. But they find that their alternative proceduredoes not significantly affect their results. For the three-state case Shimer uses an alternative procedure which has no analytical solutions for his three states, but has a solution for the two states. The latter is also used by Shigeru Fujita and Garey Ramey (2006), who deal with two states, and it is also the procedure that we follow in this paper.1 We make use of two types of data. The first isadministrative data that record all the workers who join or leave unemployment during a period, usually a month. The definition of unemployment used in these data, however, is also administrative, and it usually covers workers who qualify for unemployment compensation or who are registered at government agencies. In Britain the unemployment series constructed in this way is known as the “claimantcount”. The second data source is the quarterly Labor Force Survey, which includes a rotating panel. In each quarter we observe the state in which the worker belongs, and from this we construct the flows. This data source is similar to the US CPS but it is quarterly and typically of much shorter duration. Because the administrative data are for benefit claimants, it is biased towards workers who come...